The Biggest Ethics Question for Kranbrack Corporation
The biggest ethics question in Kranbrack Corporation's situation stems from the company's founder, Mr. Gallant, who was able to misinterpret the company's end-of-year financial statements in order to report better profits that they actually obtained. Since the firm is publicly traded on the national market, they have a basic duty to provide their owners and all prospective buyers with the most up-to-date financial statements on which to base their decisions. Moving against this ethical precept of accountability, on the other hand, poses a major ethical question that must be handled accordingly.
Reclassification of Period Costs as Product Costs
The reclassification of period costs as product costs for the current financial year will result in an increase in the reported earnings since some costs would be carried forward to the next financial year and, hence, increase the earnings. Period costs are usually recorded in the income statement as an expense for the current financial period. On the other hand, product costs are only recorded in the income statement as an expense when the units of inventory associated with the costs have been sold. Considering the fact that the Kranbrack is expected to have substantial inventories for the year, they would then be able to carry forward product costs "associated" with these inventories to the next financial year and, in the process, increase the earnings for the current period.
Violation of Ethical Obligations
I do not believe that Gallant’s actions are ethical. This is because every company has an ethical obligation to produce transparent and accurate financial information to both its shareholders and the public in general. Mr. Gallant’s actions are, therefore, not ethical as it would result in an inaccurate presentation of the earnings for both the current year and the following year when the differed product costs will be incurred. The general consequence of Gallant’s actions is that investors and shareholders may be forced into making wrong decisions such as buying more shares by relying on the financial reports provided. This will be ethically wrong as it may lead to incurred losses on the part of the shareholders and potential investors.
